Precisely two months ago, we reported something very troubling, namely that "The "Smart Money" Just Sold The Most Stocks In History [7]." This is what BofA reported at the time: "BofAML clients were big net sellers of US stocks in the amount of $4.1bn, following four weeks of net buying. Net sales were the largest since January 2008 and led by institutional clients—after three weeks of net buying, institutional clients’ net sales last week were the largest in our data history."
[8]
Just to make sure the message was heard loud and clear we followed up ten days later with "The "Smartest Money" Is Liquidating Stocks At A Record Pace: "Selling Everything That’s Not Bolted Down [9]"
We got definitive confirmation that the truly "smartest money in the room", those who dabble not in the bipolar public markets but in private equity had indeed started "selling everything that is not nailed down" several years ago hitting a climax this past quarter, when Bloomberg reported that two years after Leon Black's infamous statement, "other private-equity firms are following suit - dumping stakes into the markets at a record clip."
According to Bloomberg data, firms including Blackstone Group and TPG have been "capitalizing on record stock markets around the world to sell shares, mostly in their companies that have already gone public. Globally, buyout firms conducted 97 stock offerings in the second quarter, more than in any other three-month period."
What happened next should not have been a surprise to our readers: as we reported shortly thereafter [10], the divergence between the "smart money flow" and the S&P 500 - which at this point was merely reflecting HFT momentum ignition traps and the occasional stray retail investor - had reached unseen proportions:
[11]
So following the biggest (and only) market correction in years, the biggest weekly surge in the VIX ever, the second wholesale market flash crash in history coupled with the first ever limit down trade in the Nasdaq and the E-Mini, not to mention the biggest intraday bearish reversal since Lehman, it would appear that the "smart money" was aptly named (and hopefully wasn't selling to you).
And, lo and behold, following the dramatic market moves of the past two weeks, the S&P has finally caught up with the Smart Money flow.
[12]
A quick reminder of the "Smart Money Flow" index in question:
The Bloomberg Smart Money Flow Index is calculated by taking the action of the Dow in two time periods: the first 30 minutes and the close. The first 30 minutes represent emotional buying, driven by greed and fear of the crowd based on good and bad news. There is also a lot of buying on market orders and short covering at the opening. Smart money waits until the end and they very often test the market before by shorting heavily just to see how the market reacts. Then they move in the big way. These heavy hitters also have the best possible information available to them and they do have the edge on all the other market participants. To replicate this index, just start at any given day, subtract the price of the Dow at 10 AM from the previous day's close and add today's closing price. Whenever the Dow makes a high which is not confirmed by the SMFI there is trouble ahead.
Starting sometime in February, the smart money started getting out of Dodge, and yes, "there was troubled ahead."